As part of efforts to rescue the struggling producers, local governments are joining the State Reserves Bureau (SRB) in buying metals including copper, aluminium and zinc. Among them, metals-rich provinces Yunnan, Guangxi and Hunan have announced plans to build their metal reserves to support local smelters.

Under the scheme, enterprises will store metals in return for bank loans and government subsidies on the interest on those loans.

There has been no formal disclosure of the amount of metals bought by companies subsidised by various local governments, or purchases made by the reserves bureau. But analysts say the bureau and various provincial governments have been buying a range of metals since late last year, including more than one million tonnes of aluminium and 300,000 tonnes of copper.

The bureau's purchases of aluminium and zinc were aimed at supporting domestic smelters, while its buying of copper, lead and other rare metals was for strategic stockpiles.

The recent spike in metal prices has been partly driven by such purchases, especially those by SRB, as the amounts are much bigger.

'Unlike SRB, the impact of purchases by metals companies on metal prices and supply is very limited given their small amount,' said Heng Kun, an analyst at Essence Securities.

Companies involved in the strategic purchases included Shenzhen-listed Yunnan Tin and Yunnan Copper, but the amounts had been very small, Mr Heng said. He said some firms might have been prompted to buy metals at government requests.

Li Li, the general manager of Hunan Nonferrous Metals, said last month the firm was studying plans to take out 1.2 billion yuan (HK$1.36 billion) in bank loans to build stocks of metals produced by its plants.

The Hunan government would provide 50 million yuan annually to subsidise interest on bank loans. So far, no purchases have been finalised.

Although local governments are offering interest subsidies, companies are reluctant to stockpile as the risks involved are great.

'Such type of purchases should be done by governments, not by enterprises,' one executive said. If metal prices fell below the purchase price, it would be a further blow to the companies' profitability.

'It would be great to have the loans for working capital, but not the stockpiles,' he added.

The executive said the recent surge in metal prices was 'speculative' and would not be sustainable, as he did not see demand from customers rebounding substantially.

Pan Qifang, the company secretary of Jiangxi Copper, the mainland's largest integrated copper producer, said stockpiling was a 'symbolic' action. The firm was not involved in such type of purchases.

'It is not a problem for copper producers to find customers,' Mr Pan said. Zinc and lead may need help, as their prices are still below some producers' production costs.

While purchases from the SRB could stimulate demand and boost prices in the short term, there had to be genuine consumption over the long term, Mr Pan added.

The Ministry of Industry and Information Technology said 71 key sector players posted a combined loss of 490 million yuan for January to April, but signs of recovery were seen in March and April.

They posted profit of 1.73 billion yuan in March and 1.65 billion yuan in April.

Base metal and steel producers have cut production substantially but in most cases are insufficient to prevent a substantial inventory build-up, Macquarie said in a report.

'It appears unlikely that underlying consumption will recover significantly until the middle of the year at the earliest, and late 2009 or early 2010 looks a more likely timeframe,' it said.